Taxes Archives - Page 6 of 6

Tax Preparation Help – Online, Software, Professional, and Paper

02.05.2010 by Robert Espe //

More Tax Preparation Help

Matt has already looked at TurboTax online this week. While TurboTax is still my personal favorite tax program and I will be using the PC based TurboTax Deluxe this year, there are many other options for tax preparation. Let’s review a few of them today.

Computer software and online tax preparation

This is how I like to do my taxes. There are now more choices than ever, with programs for your computer, and lower cost options available over the Internet. The most important part of any tax software is making sure it will work for your situation. The cheaper programs are usually lighter on features. If you choose a program that only does simple (1040EZ) returns but you need a full 1040, you might end up costing yourself more than the $20 you saved.

Also consider user-friendliness. Some programs work better for beginners, others are cheaper but are suited for those with a better understanding of their tax situation.

Here are a few options for software and online tax preparation:

TurboTax is the original in this field. If you can take a bubble quiz, you can do your own taxes. In fact check out this nifty little quiz tool they made called the TurboTax TaxCaster that helps you estimate your 2009 taxes.
H & R block has joined the party and now offers online tax preparation and computer software. Both are priced to compete with TurboTax.
Tax Act is very favorably priced although it lacks TurboTaxes’ Q & A format. I have been told it is better suited for the more experienced, but I have not used it.
IRS FreeFile allows those with incomes under $57,000 to use this list of services free. Lots of choices, and all the cautions about picking an appropriate one for your situation apply. I am unable to review any of them, as my income is over $57,000. IRS FreeFile offers no state option, only federal.

The Professional

Probably the most popular way to handle tax season is to just let someone else do it for you. Personally, I believe each of us should make every effort to prepare our own taxes before handing off the responsibility to another. We sign our returns, making us liable for their contents, so it makes sense to educate ourselves to ensure they are prepared correctly. Additionally, no one cares about your money like you do – so it makes sense to assume that most professionals will be motivated by revenue first and your personal situation second.

H & R block says:

“Tax laws and IRS rules are complicated, and the language of the tax code is difficult to understand.”

I don’t think they give us enough credit… I believe we’re smarter than that! There are a lot of tools out there to help us.

In most situations you don’t have to be an accountant to understand your tax situation, and it is never a bad idea to learn how to file for yourself rather than automatically assuming it too complicated. We cannot shift the responsibility if something goes wrong, so we should not be so quick to shift the responsibility to file. Tax professionals claim to guarantee their work, but will not answer to the IRS if there is a problem. We will.

If you must use a tax professional, choose carefully. They are everywhere this time of year, and the whole lot of them are promising to get you more money than anyone else. As previously mentioned there is nothing arcane about tax preparation. It is a complex math problem, nothing more. We just need to work through the problem to find the best solution for our tax situation, and all the rules are public knowledge. You do not want to be accomplice to a tax professional with questionable practices who bends the rules to get you a little more, and we do not want to hire someone who is incompetent.

With all that said, we will now focus on tools for those who choose to shoulder the responsibility of filing their own taxes on paper.

Paper

Filing on paper is the oldest way to file our taxes – outside of armed men coming straight to our doors and taking their share.

One of the biggest advantages of filing on paper is cost – it is completely free. All you need is a stack of forms and booklets. A disadvantage is that the stack can get VERY thick really quick. Another factor to consider into the equation of filing on paper is the time spent reading all the booklets in order to fully understand what forms you need, and how best to file them. This will improve with time as your understanding and experience grow.

For the bona fide do-it-yourself-er filing on paper is an excellent option. People who use paper usually tend to have the best understanding of what exactly is going on with their tax situation. If you tend to pay in at the end of the year, I would recommend paper. Why spend $50 to spend more money… right?

The IRS now provides fillable electronic forms to make things easier. You still have to read the booklets, but these eliminate the need for a #2 pencil, and do basic computations on each form. Here are a the fillable form FAQs to help you along the way.

Final Thoughts

The most important step to finding the right tax solution is to understand what you need to pay and why. The more you learn, the better able you will be to find a product that meets your unique needs. It will also allow for better big picture financial management.

What do you think?

How are you doing your taxes this year? What positive/negative experiences have you had with various methods in the past?

First-Time Homebuyer Credit – 2009 Returns must be filed on Paper (Form 5405)

01.22.2010 by Matt Jabs //

Homebuyer Credit – Form 5405

On 1/15/2010 the IRS released the new form and applicable instructions necessary for claiming the homebuyer tax credit. Form 5405 is to be used for both ‘first-time homebuyer’ filers ($8,000 max credit) and, what the IRS is calling the ‘long-time resident of the same home’ filers ($6,500 max non-first-time homebuyer.)

Here are two quick bits of information that are sure to save you time, headache, and hassle.

1. 2009 returns MUST be filed on paper (you cannot eFile)

DO NOT let this credit effect your buying decision, but if you were already planning to take advantage of the homebuyer tax credit on your 2009 income tax return you MUST file your return on paper – you CANNOT eFile.

I touched on this point briefly in the article Tax Credits for Home Buyers and Owners but wanted to remind everyone once more in hopes that it might save someone the trouble of a rejected credit/tax return.

2. Homebuyer credit eligibility – no more guesswork

IRS form 5405 and its instructions remove any ‘guess work‘ regarding eligibility for the credit.

If you are unsure whether or not you qualify for the credit, simply download the form and instructions below and read them to determine your eligibility. As much as I would love to answer every eligibility question here, it is better for each of us to read the information and apply it to our unique situation accordingly. 😉

Down load form 5405 and the applicable instructions here:

IRS Form 5405 – First-Time Homebuyer Credit and Repayment of the Credit
IRS Form 5405 Instructions
If you would prefer to read the instructions in your browser rather than downloading the .pdf file follow this 5405 instructions link.

SEP IRA – Contribution Limits and Deadlines

01.22.2010 by Matt Jabs //

Summary of SEP IRA, contribution limits, and deadlines

A SEP is a simplified employee pension plan and is designed to furnish business owners with an easy way to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP IRA). Contributions are tax deductible and investments grow tax deferred. 10% early withdrawal penalties exist if participants make withdrawals prior to turning 59 1/2 – much like other tax sheltered plans (401(k) and traditional IRA.)

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Follow this link for information on Traditional and Roth IRA contribution limits.

Details of SEP IRA, contributions limits, and deadlines

The SEP IRA was designed as a low cost solution for allowing small businesses to provide employees with a pension without shouldering the high administrative costs of 401k’s and defined benefit plans. When an employer contributes to a SEP IRA the money goes into an IRA owned and managed by the employee.

Know the difference between contributions and deductions.

Contribution – The amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.
Deduction – The plan contributions you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Which broker should you use to manage your SEP IRA? Good question. I highly recommend using a discount broker and of the firms I’ve worked with I like TradeKing the best.

SEP IRA contribution limits

For corporations:

One of the primary benefits of a SEP IRA is that it has a high contribution limit. The 2009, 2010, and 2011 contribution limits for eligible employees are the lesser of either $49,000 or 25% of total employee compensation.

Example 1: Your employee earned $50,000 for 2010. The maximum allowable contribution to their SEP IRA is $12,500 (25% x $50,000.)
Example 2: Your employee earned $200,000 for 2010. The maximum allowable contribution to their SEP IRA is $49,000 (because 25% of $200k is $50k which exceeds the $49k limit.)

For sole proprietors:

Contribution limits for the self-employed are not quite as straight forward but, barring limits, are approximately 20% of net profits with a maximum of $49,000. Remember that any contributions to a 401(k) or IRA, along with any employer matches to your 401(k) contributions, reduce your $49,000 maximum. Basically… all combined investments in defined contribution plans cannot exceed $49,000.

Example 1: You earned $50,000 for 2010. Your maximum allowable contribution to your SEP IRA is $10,000 (20% x $50,000.)
Example 2: You earned $250,000 for 2010. Your maximum allowable contribution to your SEP IRA is $49,000 (because 20% of $250k is $50k which exceeds the $49k limit.)

Only income from the business can be contributed. Put another way, you cannot contribute money from another job separate from your business. Also, an adjustment is necessary to account for their ability to deduct both FICA taxes paid, and contributions to their own SEP IRA, both of which count toward their maximum deductible income for the year.

SEP IRA contribution and deduction deadlines

The contribution deadline for previous year SEP IRA contributions is the same as the due date of your employer’s return, including extensions. That means it is not too late for those with small businesses to lower their taxable income by contributing to their SEP IRA.

Other SEP IRA details

As mentioned above, most of the same rules that govern a Traditional IRA also apply to a SEP IRA. Specifically the minimum, no-penalty withdrawal age of 59-1/2, and the required minimum distributions beginning at age 70 1/2. Since the money contributed to a SEP IRA is pre-tax, distributions will be taxed at whatever rates are in effect for your bracket during the year of distribution. Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70 1/2 . If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70 1/2. Just remember that participants age 70 1/2 or over must take required minimum distributions. As a final consideration, the IRS does not allow a loan to be taken out against the remaining account balance. This common feature of 401k plans provides a semi-liquidity option many have come to expect, the absence of which should be considered before large sums are contributed.